DOL Keeping an Eye on Rising Tide of 401(k) Fee Lawsuits

By voicing its opinion on a case involving workers at Deere & Co., the Department of Labor has sent a message that courts need to carefully examine the claims of 401(k) participants in each of the individual suits currently pending.

The Department of Labor has sent a quiet but strong signal that it is keeping a close watch on the growing collection of 401(k) fee lawsuits—and that it will intervene in these cases if it deems necessary.

Without much fanfare, the Labor Department recently elected to formally voice its position on a 2006 lawsuit that workers at Deere & Co. filed against the company and Fidelity Investments.

That suit, which alleged 401(k) participants at Deere were being charged unreasonable and undisclosed fees and expenses, was dismissed by a federal judge in June, a move that was viewed as good news for the roughly dozen other corporations that have been hit with similar suits over 401(k) fees, including Exelon, Lockheed Martin and General Dynamics.

But now the Labor Department is saying not so fast. On March 19, it filed a brief in the 7th U.S. Circuit Court of Appeals supporting the Deere workers’ claims and requested that the judge’s earlier ruling be reversed in appeals court, where the case has been since the end of last year.

The filing of the brief, while subtle, is "incredibly significant," noted Gregory Ash, a partner in the employee benefits group of Spencer Fane Britt & Browne and head of the firm’s ERISA litigation practice.

"They didn’t have to get directly involved here; they pick and choose their battles carefully," Ash said. "The Department of Labor trolls the courts for unique issues that they believe are critical and must be addressed. Clearly, they saw this as an excellent platform to directly voice their opinions on the fee suits."

As the primary enforcer of ERISA (the 1974 Employee Retirement Income Security Act), the Labor Department has the opportunity to "really flex its muscle" and influence courts reviewing these 401(k) suits, Ash added.

Jerome Schlichter, the attorney at St. Louis-based law firm Schlichter Bogard & Denton who represents the Deere workers, as well as plaintiffs in similar suits against Boeing, Caterpillar, Exelon and General Dynamics, said the DOL’s intervention "reaffirms our position in the case."

The appeals court will likely await responses to the brief from both Deere and Fidelity. These responses are expected to be filed sometime in the next two months.

Deere officials did not return calls seeking comment. Fidelity spokesman Vincent Loporchio said the firm still believes the judge’s dismissal last year was correct, and added that Fidelity will file a response to the brief shortly.

Schlichter emphasized that in each of the other cases in which he represents workers suing their employers over 401(k) fees, judges have refused to dismiss the cases. The Deere case "has been the lone exception," he said, adding that he is "planning and expecting trials" in many of these other cases later this year.

DOL officials were unavailable to comment on the brief, but benefits attorneys said that by voicing its opinion on the Deere case, the department has sent a message that all of the courts need to carefully examine the claims of 401(k) participants in each of the individual suits currently pending.

"This is a relatively new area for the courts," said Ronald Richman, partner in the employee benefits practice at law firm Schulte Roth & Zabel in New York. "[The DOL] is saying that the judge made the wrong decision in dismissing the claims."

In the Deere case, three workers filed a suit in 2006 alleging that the company’s $2.5 billion 401(k) plan offered investment options to participants with fees and expenses that were "excessive" and "unreasonable."

The suit also named Fidelity, which provided both mutual funds and record-keeping services to Deere, as a defendant for allegedly charging the excessive fees. As a result, both Deere and Fidelity breached their fiduciary responsibilities to 401(k) participants under ERISA, the suit alleged. The workers also claimed that Deere and Fidelity failed to disclose details of a revenue-sharing arrangement between the two companies.

According to court documents, the fees on the 20 primary Fidelity funds offered in the Deere plan varied from 0.7 percent of assets for the Spartan Fund (an S&P 500 fund) to 1.01 percent for Fidelity's Diversified International Fund.

Judge Shabaz dismissed the Deere workers’ arguments that these fees were excessive, noting that participants had a wide range of fund options and fees to choose from, and also pointing out that Deere employees could have opted to use a brokerage window in the 401(k) plan that provided access to roughly 2,500 other funds.

In their original complaint filed in 2006, the Deere workers also alleged that the revenue-sharing arrangement between Fidelity affiliates involved "millions of dollars" of costs that were "far in excess of reasonable fees for the administrative and/or investment services" provided to the Deere 401(k) plan by Fidelity. The claim similarly alleged that the revenue-sharing activities inflated Deere's 401(k) expenses and caused the company to pay above-market value for administrative and investment services.

Last summer, however, U.S. District Judge John C. Shabaz granted Deere and Fidelity’s request to dismiss the case. For one, the judge cited section 404(c) of ERISA, which he said protected the two companies from fiduciary responsibility. This section essentially provides safe harbor to a fiduciary if it presents employees with adequate investment options and makes it clear to participants that they are responsible for independently selecting their investment vehicles.

"The judge basically said that the participants themselves chose to invest in the more expensive funds," said Robert Rachal, senior counsel in the employee benefits group at Proskauer Rose. "Because participants were presented with other options, the fiduciaries weren’t responsible for the losses. That’s not the way the DOL sees it, apparently."

The judge also noted in his dismissal that companies are not mandated to disclose details of revenue-sharing arrangements. The DOL contended in its brief that "ERISA’s duties of prudence and loyalty" suggest such issues deserve to be examined despite the lack of specific regulatory requirements.

The judge’s dismissal last year was perceived to be a boon to companies hit with these suits, Rachal said, since it suggested employees might not have much leverage against their employers.

"But the decision was too quick," he said. "This is an issue that requires and deserves exploration and more of a factual-based action from the courts, rather than a quick, cursory decision. And that’s exactly what the DOL, at the very least, is saying here."

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